CRA Confirms Strict Interpretation of NPO Tax Exemption

August 2010 | Andrew Valentine

On June 25, 2010, CRA released a follow-up technical interpretation to an interpretation released in December of 2009 addressing whether a condominium corporation could qualify as a non-profit organization when using surplus income to reduce members’ fees or to fund future capital projects. We commented on CRA’s December 2009 Technical Interpretation in the January 2010 edition of the Miller Thomson Charities and Not-for-Profit Newsletter.

CRA’s recently published interpretation confirms that CRA will apply a strict reading of when an organization will be found to be operating with the intentions of making a profit, such that it cannot qualify as a tax-exempt NPO.

CRA confirms that any “intentional” earning of rental profits may jeopardize a condominium corporation’s NPO status, regardless of whether this surplus income will be applied to reduce members’ fees or defray current or capital expenses. CRA states that this is particularly true when such profit is generated through income received from third parties (as opposed to members).

CRA states while an NPO should generally budget and charge fees for services so as to operate at cost, CRA will accept that a condominium corporation may charge members fees that include a portion to be allocated toward an identified capital project (such as a new roof). CRA also acknowledges that NPOs will be permitted to earn profits that are incidental to the organization’s non-profit purposes.  The question is when will the earnings be considered incidental rather than intended.

CRA also confirms that NPOs may maintain reasonable operating reserves, which refers generally to reserves maintained to meet existing but conditional liabilities.

Overall, CRA’s most recent technical interpretation confirms that CRA will take a relatively restrictive approach to the tax exemption for NPOs. Although we continue to be of the view that the CRA approach as expressed in these technical interpretations is out-of-step with the realities of operating an NPO (in which it is not practical or fiscally prudent to plan to spend all revenue in excess of costs each year) and the long-standing interpretation of this provision, it remains the case that NPOs will need to take additional care in their operations so as to reduce the likelihood of a CRA challenge to their NPO status.

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